I am reminded of the above childhood refrain from days spent playing “Hide and Seek”, with regard to the economic malaise that I and many others foresee coming to a country near you in the not too distant future – whether YOU are ready or not.
Harry Dent, of Dent research, thinks we are in for a period of deflation, and even prophesizes that the markets and Gold price will tank with Gold possibly heading down to $750.00/oz, with a major stock-market correction in 2014. And Goldman-Sachs has re-iterated its forecast that Gold will drop to $1050.
Seven years ago, Mike Maloney of GoldSilver.com, had a more nuanced grasp on monetary matters, even if Harry Dent perhaps understands economics and Demographics better. Mike Maloney suggested we would have minor inflation first, followed by a period of deflation, which will initiate a Central Bank helicopter drop of currency, and THAT would bring about the final epic period of inflation which will bring about the new financial order and even perhaps the New World Order, that so many seem to have been prophesizing.
Former Fed Governor, Ben Bernanke was famously called Helicopter Ben, for suggesting that in extremis, a committed government or Central Bank could create inflation by dropping currency from a helicopter. It is a tag he has never quite lost. And Janet Yellin seems to be Bernanke’s biggest protégé.
For me, I choose to follow my instincts and try to wind my way through the differences of opinion. I am also a great believer in history repeating itself. Especially when the same or similar circumstances prevail.
Demographics drives personal spending patterns, as Dent has proved, but Central Banks and Governments have a habit of reacting to those events. Some, like the Americans and Europeans, lend that newly minted Central Bank money to the Senior Banking sector, in the vain hope that the banks will lend that money into the economy. (Or merely to prop up those banks?)
Governments spend money on infrastructure projects, which they are pretty certain will boost the economy. Witness the Tory Government of Margaret Thatcher giving the go ahead on the Channel Tunnel project during the 1980’s, and Britain’s New Labour Government giving the go ahead to the group that built the “Millennium Dome” (now the O2 Arena). And the current coalition’s attempts to make big infrastructure gestures with the HS2 – High Speed rail Link from London to the North West, and a new Airport for London, or an extra runway at London’s Heathrow are also in the mix.
But of course we know that when politician’s spend with one-hand, they take in taxes with the other. And that usually means you and me get to spend less on things we consider important to us.
Of course there can be an antidote to all this, and that is to improve one’s lot by saving and good investing, particularly in tax efficient investments.
The last time we had a similar set of circumstances was in 1975/76, as the inflation rate that had risen to almost 27% the previous year, fell to 8-9%, considered acceptable by many at the time.
Of course back then, this inflation prompted Tesco, to ditch the Green Shield Stamps of yesteryear, and to plan a new strategy with deep discounting, which was planned for 6th July 1977 in “Operation Checkout”.
Over the Week-end of the 4th and 5th all their stores were re-priced, and the stores became like a light to moths and other night-time flying insects. Turnover all but doubled in many stores. But of course it was the demographics that was driving the economy.
Given TESCO’s recent results, will they repeat this exercise to compete with the new kids on the block – Lidl, and ALDI?
During the late sixties, western countries had large numbers of retirees, born at the turn of the century in the late Victorian and early Edwardian eras, who fought in the 1914-18 war, and again in 39-45. These 60+ year olds were now retired and retiring in droves, spending their retirement proceeds, as they sold their pension accounts to buy bonds, driving down interest rates and stock prices with equal aplomb. These retirees who had fought – some in TWO World Wars, felt they deserved the relaxed retirement that they were promised. The world fit for heroes.
However, just as recently, in April 2012, the number of retirees in the U.S. reached 10,000 per day as those born in the aftermath of the second world war – the baby-boomers, began retiring in huge numbers, but the early retirers had already been selling their stock portfolios (or their pension companies were) as early as 2003, as the oldest ones retired at 55 or just after.
Those with a fixed lump sum to spend, put deposits down on the already rising property market, and helped in the “buy-to-let” boom of that period, and just as the profits made by the NASDAQ investors in the late 90s, also put their winnings into property, Banks were lending outrageous multiples to people in low income areas.
The Fed and government’s actions have been an attempt to mitigate these affects on the economy since. And foreign wars in foreign lands (as long as not too many of “OUR” boys get killed), is one way of keeping the economy ticking along. Economists call this the “guns and butter economy”, as an economy cannot direct resources to both with equal measure.
Anyway, as I was reading another blog, that talked about investments and the US Bond Markets, it mentioned the Fed’s requests to other nations – Belgium – to be precise – who apparently have been pressed into supporting the dollar by buying T-Bills, in the absence of the Fed, to keep interest rates from spiking, which would cause another recession, but as I read this, something crossed my mind.
What if Russia and China now decide to abandon the dollar for commodities sales to non-western aligned countries – say with Vietnam? Iran? Or how about Brazil? India? And what if others followed suit causing a run on the dollar?
This could cause an all out dollar crisis, necessitating a hike in interest rates, that would be painful to watch. But it might also stress the system and induce the hyperinflation that many fear – myself included.
Of course, if you read the book “The Coming Battle” you will know that the Fed made surreptitious loans to 20 major Banking groups in Europe of $15 TRILLION, in total – interest FREE, during the heat of the last financial crisis, and they may be now calling in that favour – requesting that these Banks buy Fed debt, to support the dollar, keeping the Gold price in check.
But, if Russia decides to avoid the dollar, then all bets are off
In my last post, I mentioned that Gazprom, would under different circumstances be possibly a good investment opportunity, and then I remembered the sage advice of Baron Rothschild in his oft quoted phrase: “Achetez aux canons, vendez aux clairons”.
For those who don’t speak french, it means figuratively – Buy on the sounds of the cannons, sell on the sounds of triumphalism (or trumpets). Put more simply, “Buy when the war starts, sell when it ends.”
Now I’m not suggesting you put 100% of your portfolio into Gazprom. But if you do your due diligence, and research the MICEX,(Moscow International Commodities Exchange) there will be opportunities, and/or some of the other Russian behemoths, that might benefit from “the return to the mean”, and there could be money to be made.
Anyone who has been investing for any length of time, knows, or will have heard, that on the average, stock prices rise in line with growth in the economy. When they temporarily exceed this price, they fall, and where they are below the average they will at some point return to the average (the mean).
Of course as many of my recent posts will no doubt have showed, the amount of currency being injected into the economy at any particular point in time, can affect certain asset prices. Of course when cash is tight (as in a recession) bank lending goes down, and thus asset prices reflect that lowering of available capital. And when banks have money to burn (so to speak) then lending goes up, and so do asset prices – particularly stocks and property.
Of course the banks take advantage of this, by lending when asset prices are cheap, and forcing foreclosure (where they have to) when interest rates become high. (which of course, they control)
Warren Buffet also known as “The Sage of Omaha” advises to buy when an asset is cheap, and to sell when the asset is dear, and has said – “Be greedy when others are fearful, and fearful when others are greedy”.
Of course the good sage also buys businesses that will never be sold, but ensures good management manage the business and give a good return on his investment. His last maor purchase that I am aware of was H. J. Heinz, of 57 varieties fame.
He also made major purchases in American Rail infrastructure, in light of the production of tar-sands, and shale oil and gas from the Bakken oil fields in Montana, and Wyoming, and north of the border in Canada which will have to be moved to refineries in the south. And given the size of the finds, this will guarantee regular shipments for years to come.
Another of Russia’s behemoths, and one slightly less well known than its bigger brother but also worth a look is Rosneft.
However, a precipitous fall in the dollar will force many stocks into freefall on international valuations, and force those who hold dollars to flee the dollar also, but into what? Probably GOLD and SILVER.
Grant Williams, who is portfolio manager of the Vulpes Precious Metals Fund, also spoke about exactly what will cause this historic rise in the gold price, as well as what it will mean for the global financial system.
There are reports out this week that the BRIC nations are going to set up a version of the IMF and a BRICs Development Bank, which could trigger the collapse. The amount of trade now being done in Yuan directly between the Chinese and their trading partners, is all a move away from the dollar, which will over time weaken the dollar’s rule as world reserve currency, and with it the U.S. Empire.
Williams also thinks the Russians want to swap oil for gold because they want to bring back gold as a monetary asset. They just want gold, and rather than swap their oil for dollars or roubles, they would rather have gold for it, and they are absolutely right to do that.
From the view, from 30,000 feet as a Central Bank, they can make those decisions. And Williams guarantees the Russian central bankers, who are in charge of their gold policy, are not worrying about whether the price of gold is $1,300, $1,200, or $1,500. They don’t care about that. They just want to own the gold. And so they are going to keep doing these deals that enable them to acquire more physical metal.
At some point, when all the smoke is cleared in the paper markets, like it did during the London Gold Pool in the late 1960s, once that gets righted, then we will know what the right price is for gold.”
We know the London Gold Pool ended finally when France and then Britain asked for $3billion dollars worth of Gold in place of the depreciating dollars, just 4 days before Nixon closed the Gold window for good (even though, he said it was temporary).
Will that happen this time? I doubt it, the U.S. and European Banks are too intertwined.
But Russia’s and China’s Banks?
Now they could do some serious damage.
But an even bigger threat comes courtesy of a number of major actors in the formation of the internet – though they didn’t know it at the time…